[Federal Register: September 7, 2000 (Volume 65, Number 174)]
[Notices]
[Page 54303-54315]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07se00-134]
[[Page 54303]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10781, et al.]
Proposed Exemptions; Journal Company, Inc. 401(k) Savings Plan,
et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, D.C.
20210. Attention: Application No. ______, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5638, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Journal Company, Inc. 401(k) Savings Plan (the Plan) Located in
Trenton, New Jersey
[Application No. D-10781]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of 406(a) and 406(b)(1), 406(b)(2), and
406(b)(3) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(F) of the Code, shall not apply to: (a) the receipt by certain
affiliates and predecessors of Journal Register East, Inc. (JRE), by
Boatmen's Trust Company (the Bank), and by certain individuals alleged
in a complaint to have been or to be fiduciaries of the Plan
(collectively, the Defendants) of releases signed by participants in
the Plan, in which such participants waive their rights to sue in
connection with the acquisition and retention in such participants'
accounts in the Plan of interests in certain guaranteed investment
contracts (GICs) issued by Confederation Life Insurance Company (CLI);
and (b) the payment by the corporate Defendants of a settlement amount
to be allocated to the accounts of participants in the Plan in exchange
for release from liability obtained from such participants; provided
that the following conditions are satisfied:
(a) The payment of the settlement amount is a one-time cash
transaction;
(b) Each participant whose account in the Plan has an interest in
the GICs decides whether, in exchange for the settlement amount, to
waive his or her right to sue in connection with the acquisition and
retention in such participant's account in the Plan of interests in
such GICs; or to opt out of such settlement and retain all such rights
and causes of action;
(c) Pursuant to the terms of the settlement, the account of each
participant in the Plan who waives his or her right to sue receives an
amount of the settlement proceeds in proportion to the interest each
such account has in the GICs;
(d) Pursuant to the terms of the settlement, the corporate
Defendants are responsible for paying the attorneys' fees to the law
firm representing the plaintiffs (the Plaintiffs);
(e) A portion of the fees that would have been due and payable to
the Plaintiffs' attorneys will be withheld from the settlement proceeds
by JRE, an employer of employees covered by the Plan, and paid to the
Plaintiffs' in cash based on each Plaintiff's share of the amount of
the settlement proceeds allocated to all of the Plaintiffs;
(f) Notwithstanding the waiver by any participant of his or her
right to sue, the Plan does not release any claims, demands, and/or
causes of action which it may have in connection with the acquisition
and retention in participants' accounts in the Plan of interests in the
GICs;
(g) No expenses are incurred by the Plan as a result of the
settlement;
(h) The Plaintiffs' attorneys and each participant who signs the
release and waives his or her right to sue will monitor the payment of
the settlement proceeds by the corporate Defendants and the allocation
of the proper amounts into such participants' accounts in the Plan, in
order to ensure compliance with the terms of the settlement agreement;
and
(i) All terms and conditions of the transaction are no less
favorable than those obtainable at arm's length with unrelated third
parties.
Effective Date: The proposed exemption is effective upon the date
that the Defendants enter into a settlement of the lawsuit with the
Plaintiffs, as described below.
[[Page 54304]]
Summary of Facts and Representations
1. The applicant, JRE, is a corporation organized under the laws of
the State of Delaware with its principal place of business in Trenton,
New Jersey. JRE is the wholly-owned subsidiary of Journal Register
Company (JRC). JRC is a publicly traded corporation engaged in the
publishing business. In this regard, JRC owns and operates eighteen
(18) daily newspapers and 118 non-daily publications throughout the
United States.
2. In December of 1993, JRC acquired ownership of the Evening Call
Publishing Company (Evening Call). At the time of the acquisition,
Evening Call was the publisher of a newspaper in Woonsocket, Rhode
Island, and the sponsor of the Evening Call Publishing Company Savings
Plan (the Evening Call Plan).
Established in August 1985, the Evening Call Plan was a defined
contribution plan in which individual accounts were established and
maintained for the benefit of eligible participants. Such accounts
consisted of voluntary contributions deducted from participants' wages
on a pre-tax or post-tax basis with matching contributions from Evening
Call. Certain employees of Evening Call served as trustees and
fiduciaries of the Evening Call Plan. Either Evening Call served as
plan administrator or delegated that responsibility to various
individuals who held the position as publisher of the newspaper.
It is represented that the plan administrator selected CLI, as
funding agent for the Evening Call Plan. At that time, CLI was a
Canadian corporation doing business as an insurance company in the
United States through branches in Michigan and Georgia. Further, it is
represented that the plan administrator selected as investment options
for the Evening Call Plan an equity fund and a guaranteed investment
fund, both of which were managed by CLI. Participants in the Evening
Call Plan could specify how the assets allocated to their individual
accounts would be invested. In this regard, the Evening Call Plan
provided that all or a portion of the assets in a participant's account
could be directed into either or both investment options. The
guaranteed investment fund consisted entirely of investments in one or
more GICs issued by CLI.
It is represented that participants were informed that investments
in the GICs, made between August 1, 1986, and July 31, 1988, were
guaranteed a rate of return of 9.10% per annum, compounded through July
31, 1996. Under the terms and conditions of the GICs, participants who
directed assets from their accounts in the Evening Call Plan into such
GICs could not change investment options until the GICs matured in 1995
and 1996. Further, it is represented that the GICs were illiquid, and
that there was no secondary market for such GICs.
3. The Journal Company, Inc. 401(k) Savings Plan (the Plan), which
is the subject of this exemption, is the successor in interest to the
Evening Call Plan. The Evening Call Plan was merged into the Plan in
December 1993. In this regard, it is represented that the assets held
by the Evening Call Plan in the form of the GICs were allocated to
separate accounts for those participants in the Plan who formerly were
participants in the Evening Call Plan.
JRE is the employer and sponsor of the Plan. Other participating
employers in the Plan are all members of the same controlled group of
corporations and include affiliates, divisions, or subsidiaries of JRE
or JRC. The Plan is an individual account plan into which employees of
such participating employers defer salary. It is represented that there
were approximately 939 participants and beneficiaries in the Plan, as
of March 31, 1999. As of June 30, 1999, the estimated fair market value
of the assets in the Plan was $15,868,776.
The Bank, a Delaware corporation with principal offices in St.
Louis, Missouri, served, for the period from April 1, 1994, until
January 28, 1998, as trustee and administrator of the Plan. The current
trustee of the Plan is Merrill Lynch Trust Co.
4. In 1994, CLI was placed in receivership. In this regard, on
August 11, 1994, Canadian insurance regulatory authorities placed CLI
into a liquidation and winding-up process. Further, on August 12, 1994,
the insurance authorities of the State of Michigan commenced legal
action to place the United States operations of CLI into
rehabilitation; thereby freezing the investments in GICs held by the
participants' individual accounts in the Plan. At that time, CLI
proceeded to liquidate its assets under a plan of liquidation approved
by the Circuit Court for the County of Ingham, Michigan. It is
represented that on or about March 1997, of three (3) distribution
options, the Plan selected the one which provided the most immediate
payment to participants in the Plan. In April of 1997, CLI began making
payments on behalf of the GICs.
It is represented that seventy-five (75) participants in the Plan
had interests in the GICs in their accounts which had been frozen. In
early June 1997, the Plan received notice of distribution from the
estate of CLI on behalf of such participants' accounts. In July 1997,
payments made by CLI were allocated to the accounts of such
participants in the Plan. The application states that when the accounts
were unfrozen, the participants received earnings from the CLI
investment that were lower than would have been received pursuant to
the terms of the GICs, if such terms had been honored by CLI.
5. On August 11, 1997, twenty-six (26) individuals filed suit in
the United States District Court for the District of New Jersey against
the Defendants. The Defendants listed in the complaint included the
Bank, JRC, Evening Call, and Journal Register Newspaper's, Inc. (JRN),
the former parent of Evening Call, and certain individuals alleged to
be trustees and fiduciaries of the Evening Call Plan or members of the
Board of Directors of JRC and its subsidiaries, JRN and Evening Call.
Some of the individual Defendants are also participants in the Plan
whose accounts now hold interests in the GICs.
All of the individual Plaintiffs were employees of Evening Call and
are or were employees of JRE or its affiliates. All of the Plaintiffs
are members of a single bargaining unit represented by Local 128 of the
Woonsocket Newspaper Guild, AFL-CIO. The Plaintiffs were all
participants in the Evening Call Plan and are participants whose
accounts in the Plan hold interests in the GICs. Further, the accounts
in the Plan of other participants, who are neither Plaintiffs nor
Defendants, also hold interests in the GICs.
The Plaintiffs filed suit against the Defendants for breach of
fiduciary duty. In this regard, the complaint alleged that the
Defendants breached their fiduciary duties to the Plaintiffs by failing
to exercise prudence in the selection of Plan investments, by failing
to monitor the continued retention of the GICs in the Plan, by failing
to disclose relevant information to the Plaintiffs with respect to the
GICs on a timely basis, by failing to create and maintain a system
through which participants could direct investments in their accounts
consistent with section 404(c) of the Act, and by failing to adequately
diversify Plan assets.
As relief, the complaint demands that the Defendants make whole the
Plaintiffs' and other participants' individual accounts in the Plan
from all losses and damages suffered as a result of the Defendants'
breaches of fiduciary duties and violations of the Act. In addition,
Plaintiffs seek pre-judgment and post-judgment interest on amounts
[[Page 54305]]
awarded, reasonable attorneys fees, costs and expenses, and all other
legal, equitable, or remedial relief, as deemed appropriate by the
court.
As of August 1999, the Defendants had not filed a formal answer to
the complaint. Notwithstanding the Plaintiffs' allegations, the
Defendants maintain that there was no breach of fiduciary duty involved
in the decision to select or retain the GICs in the Plan or in the
handling of such GICs. Rather, the Defendants argue that losses, if
any, that may have occurred as a result of the Plan's holding of the
GICs were inherent risks associated with the higher returns available
from such an investment, and that no compensable injury occurred.
Further, JRE maintains that some of the individuals named as Defendants
were not, in fact, fiduciaries with respect to the issues raised in the
complaint.
The applicant also represents that the Bank contends it was not a
fiduciary with respect to the issues raised in the complaint. In this
regard, the applicant states that the Bank was the directed trustee of
the Plan until January 28, 1998, and thereafter, was not currently a
directed trustee or fiduciary of the Plan. Further, it is represented
that the Bank is not now a party in interest with respect to the Plan.
6. The two (2) corporate Defendants, JRC and the Bank, have
proposed a settlement of the litigation with the Plaintiffs. In this
regard, within fifteen (15) days of the publication of a final
exemption on the subject transactions, each of the corporate Defendants
proposes to deliver to the trustee of the Plan a bank or certified
check representing its respective share of the settlement amount. JRC
will pay $253,125, plus interest, of the settlement amount; and the
Bank will pay $50,000, plus interest, of the settlement amount. The
entire settlement amount in the aggregate is equal to $303,125, plus
interest. Of this settlement amount, $258,125, plus interest, is
allocated for payments to the accounts of participants who accept the
settlement terms; and, as discussed more fully below, $45,000, plus
interest, is allocated for payment of the fees of the attorneys for the
Plaintiffs.
It is represented that the settlement amount was reached based on
the costs and risks of litigation and represents a compromise between
the conflicting positions of the Plaintiffs and Defendants. None of the
individual named Defendants who are also participants in the Plan will
contribute any funds toward the settlement amount. The settlement is
contingent on all named Plaintiffs executing releases. It is expected
that all Plaintiffs will do so, on the recommendation of their counsel.
In the proposed settlement agreement, the Defendants will
specifically deny all claims and contentions alleged by the Plaintiffs
and will not admit any wrongdoing or liability. Pursuant to the terms
of the settlement, an escrow account will be established into which a
settlement payment in the amount of $258,125, plus interest, will be
deposited.\1\ Each of the seventy-five (75) Plan participants whose
accounts have an interest in the GICs (including those who are not
named as Plaintiffs, and those who are named as Defendants) will be
informed of the settlement and its terms, and will be asked to execute
and return a release of all actual or potential claims against the
named Defendants, all of their affiliates, predecessors, officers,
directors, and employees serving as fiduciaries, arising out of the
acquisition and holding of interests in the GICs by individual
participant accounts in the Plan.
---------------------------------------------------------------------------
\1\ The applicant anticipates treating the amounts paid under
the settlement agreement, as restorative payments. In this regard,
the applicant is relying on certain private letter rulings by the
Internal Revenue Service that a restorative payment made to a
defined contribution plan in response to claims of fiduciary breach
made by participants: (a) Will not constitute a ``contribution'' or
other payment subject to the provisions of either section 404 or
section 4972 of the Code; (b) will not adversely affect the
qualified status of such plan, pursuant to either section 401(a)(4)
of section 415 of the Code; and (c) will not, when made to such
plan, result in taxable income to the plan participants and
beneficiaries. The Department, herein, is offering no opinion on
whether the amounts received by the participants, pursuant to the
terms of the settlement agreement, constitute restorative payments
under the Code.
---------------------------------------------------------------------------
Under the proposed settlement, each Plan participant whose account
has an interest in the GICs must decide whether to accept the proposed
settlement, or to opt out of it and retain whatever rights and causes
of actions he or she may have. Each participant who chooses to accept
the proposed settlement must release all claims arising from the
matters involved in the litigation. It is represented that no fiduciary
of the Plan will exercise discretion or provide advice to, or otherwise
assist, any other participant with respect to the decision as to
whether to accept the proposed settlement.
To the extent a participant agrees to release all actual or
potential claims arising out of the acquisition and holding of
interests in the GICs by his or her account in the Plan, it is
represented that a proportional amount of the escrow shall be paid to
the Plan (in proportion to the amount each such participant's account
had invested in the GICs) and that such amount shall be allocated to
such participant's account under the Plan. For example, if a
participant's account held a one percent (1%) interest in the GICs,
that participant's account would receive one percent (1%) of the
$258,125, plus interest, out of the settlement proceeds. It is
represented that named Defendants whose accounts in the Plan also hold
interests in the GICs by reason of such Defendants' status as plan
participants will receive the same treatment as all other non-plaintiff
plan participants. If a participant who signed the release does not
cash the distribution check or cannot be located at the time a
distribution from the individual participant accounts would be
appropriate under the Plan, standard provisions of the Plan will apply.
Such provisions generally provide that the plan administrator will use
the appropriate ``lost participant'' facilities to locate the
participant, and if the participant cannot be located, the assets in
the individual's account will be forfeited to the Plan, subject to
restoration to the individual upon location of such missing
participant.
Any participants who do not sign a release will not receive an
allocation into their account from the settlement proceeds. As a
result, the funds that otherwise would have been allocated to such
participant's account from the settlement proceeds, had the participant
signed the release, will be returned to the settling Defendants.
As described above, $258,125, plus interest, of the settlement
amount is allocated for payment to the accounts of participants who
accept the settlement terms; and, $45,000, plus interest, is allocated
for payment to the law firm representing the Plaintiffs to cover
attorneys' fees and expenses in connection with the law suit. In this
regard, the law firm representing the Plaintiffs has agreed to waive a
portion of such attorneys' fees. It is anticipated that of the sum of
$45,000, plus interest, that otherwise would have been paid out of the
settlement proceeds to the attorneys of the Plaintiffs, JRE will
withhold approximately $16,000, plus interest, representing the portion
of such attorneys' fees that will be waived. The portion of the
Plaintiffs' attorneys' fees that is waived by the Plaintiffs' attorneys
will be paid by JRE to the Plaintiffs in cash, based on each
Plaintiffs' share of the amount of the settlement proceeds allocated to
all of the Plaintiffs. In this regard, it is represented that it is an
accepted practice to reimburse individuals, such as the Plaintiffs, for
the time, effort, and financial resources they expended in
[[Page 54306]]
bringing the litigation and negotiating the settlement.
7. The applicant recognizes that the proposed settlement could be
deemed to be an indirect exchange between a plan and a party in
interest in violation of section 406 of the Act; and accordingly, has
requested administrative relief.
8. It is represented that the proposed exemption is in the best
interests of the Plan and its participants, because the accounts of
participants which have interests in the GICs will receive an immediate
and substantial portion of the return on such GICs. In this regard,
when combined with amounts already received upon the liquidation of
CLI, each participant's account in the Plan will receive more than 128%
of the face value of their share of the GICs, including interest earned
to maturity. When frozen on August 12, 1994, the GICs were valued at
approximately $1,442,113. The latest maturity date of the Plan's GICs
is represented to be July 31, 1996. If allowed to mature on schedule,
the value would have grown to an estimated $1,497,646. In this regard,
the difference (approximately $50,000) between the value on the date of
the freeze and at maturity is attributable to the fact that a
substantial number of the GICs began to reach their maturity dates not
long after the freeze was imposed. In July 1997, the Plan received
approximately $1,620,053 from CLI, which amount was distributed to the
participants' accounts in the Plan. The settlement of the litigation in
1999 will add $303,125 to that amount, resulting in an amount (ignoring
lost opportunity costs) that is equal to $425,532 above the value of
the GICs at maturity.
With respect to compensating the Plaintiffs for any lost
opportunity, while the funds were frozen, to invest in a mix of options
heavily weighted in favor of equities, it is the Defendants' position
that this would give rise to a claim for more than the actual loss. In
this regard, although it is now known that the stock market performed
well during the freeze period, the Defendants maintain: (a) That the
Plaintiffs had demonstrated risk aversion by investing in the fixed-
income option offered by the GICs; and (b) that once the GICs matured
the Plaintiffs would have invested their accounts in a similar fixed-
income option which would have earned far less than the equity-weighted
mix, as suggested by their counsel.
Further, the applicant maintains that if the proposed exemption is
not granted, the litigation may not be settled, and it is not possible
to determine if the Plaintiffs would be successful in pursuing their
claims to a judgment. Furthermore, it is possible that those
participants who are not named Plaintiffs will never be able to obtain
any recovery, because the litigation is not styled as a class action,
and it is likely that the statute of limitations will run on the claims
of the participants who are not Plaintiffs. Even if the Plaintiffs were
to be successful in their suit, any recovery would be delayed
substantially, and may prove to be a lesser amount than that offered as
part of the proposed settlement.
9. The requested exemption is administratively feasible because it
involves a one-time payment of cash to the participants' accounts in
Plan in exchange for releases of liability from such participants. In
this regard, it is represented that once the settlement amounts have
been distributed, no further actions are contemplated under the
settlement, and no further review or monitoring will be required.
Further, no expenses will be incurred by the Plan as a result of the
settlement. JRE will bear the costs of the exemption application and of
notifying interested persons.
10. It is represented that the proposed exemption contains
sufficient safeguards for the protection of the rights of the
participants and beneficiaries of the Plan. In this regard, Plaintiffs'
attorneys and each participant who signs the release and waives his or
her right to sue will monitor the payment of the settlement proceeds by
the corporate Defendants and the allocation of the proper amounts into
such participants' accounts in the Plan, in order to ensure compliance
with the terms of the settlement agreement. The Plaintiffs' attorney
will receive a listing of the allocation for each of the Plaintiffs and
will be able to confirm that the allocation has been properly
performed. Further, accompanying the notification of settlement, each
participant whose account holds an interest in the GICs will receive a
statement that includes a calculation of the allocation of the
settlement amount and a description of how such amount was calculated.
Thereafter, regular statements from the trustee will reflect the
allocation of the settlement amount into the account of the Plan
participants who accept the settlement terms. It is further represented
that the settlement provides that any breach of the settlement
agreement can be remedied by the district court judge overseeing such
litigation.
11. In summary, the applicant represents that the proposed
transactions will meet the statutory criteria of section 408(a) of the
Act and 4975(c)(2) of the Code because:
(a) The payment of the settlement amount will be a one-time cash
transaction;
(b) Each participant whose account in the Plan has an interest in
the GICs will decide whether to waive his or her right to sue the
Defendants in exchange for the settlement amount; or to opt out of such
settlement and retain all such rights and causes of action against the
Defendants;
(c) Pursuant to the terms of the settlement, the account of each
participant in the Plan who waives his or her right to sue the
Defendants will receive an amount of the settlement proceeds in
proportion to the interest each such account has in the GICs;
(d) Pursuant to the terms of the settlement, the corporate
Defendants are responsible for paying the attorneys' fees of the law
firm representing the Plaintiffs;
(e) A portion of the fees that would have been due and payable to
the Plaintiffs' attorneys will be withheld from the settlement proceeds
by JRE, the employer, and paid to the Plaintiffs in cash based on each
Plaintiff's share of the amount of the settlement proceeds allocated to
all of the Plaintiffs;
(f) Notwithstanding the waiver by any participant of his or her
right to sue the Defendants, the Plan will not release any claims,
demands, and/or causes of action which it may have against the
Defendants;
(g) No expenses will be incurred by the Plan as a result of the
settlement;
(h) The Plaintiffs attorneys and each participant of the Plan who
signs the release and waives his or her right to sue the Defendants
shall monitor the payment of the settlement proceeds by the corporate
Defendants and the allocation of the proper amounts into such
participants' accounts in the Plan, in order to ensure compliance with
the terms of the settlement;
(i) All terms and conditions of the transaction will be no less
favorable than those obtainable at arm's length with unrelated third
parties; and
(j) As a result of the settlement, the participants whose accounts
hold an interest in the GICs will receive an immediately and
substantial portion of the investment return guaranteed by such GICs.
Notice to Interested Persons
Included among those persons who may be interested in the pendency
of the requested exemption are all participants and beneficiaries in
the Plan who have an interest in the GICs. It is represented that
within ten (10) days after the publication of the Notice of Proposed
Exemption (the Notice) in
[[Page 54307]]
the Federal Register, JRE will notify interested persons by mailing
first class to the last known mailing address of such persons a copy of
the Notice and a copy of the supplemental statement, as required,
pursuant to 29 CFR 2570.43(b)(2) to each participant and beneficiary in
the Plan who has an interest in the GICs. All interested persons are
invited to submit written comments or requests for a hearing on this
proposed exemption to the Department. Comments and requests for a
hearing must be received by the Department within 45 days of
publication of the Notice in the Federal Register.
For Further Information Contact: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 219-8883. (This is not a toll-free number.)
Sun Life Assurance Company of Canada (Sun Life), Located in
Toronto, Ontario, Canada
[Application No. D-10814]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).\2\
---------------------------------------------------------------------------
\2\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply, effective March 22, 2000, to the (1) receipt of
common stock (Common Shares) issued by Sun Life Financial Services of
Canada, Inc., the holding company for Sun Life (the Holding Company),
or (2) the receipt of cash (Cash) or policy credits (Policy Credits),
by or on behalf of any eligible policyholder (the Eligible
Policyholder) of Sun Life which is an employee benefit plan (the Plan),
subject to applicable provisions of the Act and/or the Code, including
any Eligible Policyholder which is a Plan established by Sun Life or an
affiliate for their own employees (the Sun Life Plans), in exchange for
such Eligible Policyholder's membership interest in Sun Life, in
accordance with the terms of a plan of conversion (the Conversion Plan)
adopted by Sun Life and implemented under the insurance laws of Canada
and the State of Michigan.
This proposed exemption is subject to the conditions set forth
below in Section II.
Section II. General Conditions
(a) The Conversion Plan was implemented in accordance with
procedural and substantive safeguards that were imposed under the
insurance laws of Canada and the State of Michigan and was subject to
review and/or approval in Canada by the Office of the Superintendent of
Financial Institutions (OSFI) and the Minister of Finance (the Canadian
Finance Minister) and, in the State of Michigan, by the Commissioner of
Insurance (the Michigan Insurance Commissioner).
(b) OSFI, the Canadian Finance Minister and the Michigan
Insurance Commissioner reviewed the terms of the options that were
provided to Eligible Policyholders of Sun Life as part of their
separate reviews of the Conversion Plan. In this regard,
(1) OFSI (i) authorized the release of the Conversion Plan and all
information to be sent to Eligible Policyholders; (ii) oversaw each
step of the conversion process (the Conversion); and (iii) made a final
recommendation to the Canadian Finance Minister on the Conversion Plan.
(2) The Canadian Finance Minister, in his sole discretion, could
consider such factors as whether: (i) The Conversion Plan was fair and
equitable to Eligible Policyholders; (ii) whether the Conversion Plan
was in the best interests of the financial system in Canada; and (iii)
sufficient steps had been taken to inform Eligible Policyholders of the
Conversion Plan and of the special meeting (the Special Meeting) on the
Conversion.
(3) The Michigan Insurance Commissioner made a determination that
the Conversion Plan was (i) fair and equitable to all Eligible
Policyholders and (ii) consistent with the requirements of Michigan
law.
(4) Both the Canadian Finance Minister and the Michigan Insurance
Commissioner concurred on the terms of the Conversion Plan.
(c) Each Eligible Policyholder had an opportunity to vote to
approve the Conversion Plan after full written disclosure was given to
the Eligible Policyholder by Sun Life.
(d) One or more independent fiduciaries of a Plan that was an
Eligible Policyholder received Common Shares, Cash or Policy Credits
pursuant to the terms of the Conversion Plan and neither Sun Life nor
any of its affiliates exercised any discretion or provided ``investment
advice,'' as that term is defined in 29 CFR 2510.3-21(c), with respect
to such acquisition.
(e) After each Eligible Policyholder was allocated 75 Common
Shares, additional consideration was allocated to an Eligible
Policyholder who owned an eligible policy based on an actuarial formula
that took into account such factors as the total cash value, the base
premium and the duration of such eligible policy. The actuarial formula
was reviewed by the Canadian Finance Minister and the Michigan
Insurance Commissioner.
(f) With respect to a Sun Life Plan, where the consideration was in
the form of Cash or Common Shares, an independent Plan fiduciary --
(1) Determined that the Conversion Plan was in the best interest of
the Sun Life Plans and their participants and beneficiaries;
(2) Voted for the Conversion Plan on behalf of the Sun Life Plans;
(3) Received either Common Shares or Cash on behalf of a Sun Life
Plan;
(4) Determined that the transactions did not violate the investment
objectives and policies of the Sun Life Plans;
(5) Negotiated on behalf of the contributory Sun Life Plans and
determined a reasonable allocation of proceeds between Sun Life and the
participants in the Sun Life Plans; and
(6) Took (and will continue to take until the proposed exemption
becomes final) all actions that were (or will be) necessary and
appropriate to safeguard the interests of the Sun Life Plans.
(g) All Eligible Policyholders that were Plans participated in the
transactions on the same basis within their class groupings as other
Eligible Policyholders that were not Plans.
(h) No Eligible Policyholder paid any brokerage commissions or fees
to Sun Life or its affiliates in connection with their receipt of
Common Shares or with respect to the implementation of the initial
public offering (the IPO) in which an Eligible Policyholder could elect
to sell such Common Shares for cash.
(i) All of Sun Life's policyholder obligations will remain in force
and will not be affected by the Conversion Plan.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Sun Life'' means Sun Life Assurance Company of
Canada and any affiliate of Sun Life as defined in paragraph (b) of
this Section III.
(b) An ``affiliate'' of Sun Life includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under
[[Page 54308]]
common control with Sun Life; (For purposes of this paragraph, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual.) or
(2) Any officer, director or partner in such person.
(c) The term ``Eligible Policyholder'' means a policyholder who--
(i) On January 27, 1998 (the Eligibility Day) was the owner of a
voting policy;
(ii) Was the holder of a voting policy issued by Sun Life, if the
policy was applied for by that person on or before the Eligibility Day
and the application was received by Sun Life within a period specified
by Sun Life in the Conversion Plan;
(iii) Was the holder of a voting policy, issued to the holder by
Sun Life, that lapsed before Sun Life's Eligibility Day and was
reinstated during the period beginning on the Eligibility Day and
ending 90 days before the day on which Sun Life's Special Meeting was
held; or
(iv) Was named by Sun Life in its Conversion Plan as an Eligible
Policyholder under subsection 4(4) of the Conversion Regulations.
(d) The term ``Policy Credit'' means--
(1) For an individual or joint ordinary life insurance policy, an
increase in the paid-up dividend additional cash value or dividend
accumulation value;
(2) For a policy that is in force as extended term life insurance
pursuant to a nonforfeiture provision of a life insurance policy, an
extension of the coverage expiry date;
(3) For a policy which is a deferred annuity certificate, an
increase in the deferred annuity payment; and
(5) For a policy which is an individual accumulation annuity, an
increase in the account value.
Effective Date: If granted, this proposed exemption will be
effective as of March 22, 2000.
Summary of Facts and Representations
1. Sun Life is an insurance company that is incorporated under the
laws of Canada. Formerly, Sun Life was a mutual life insurance company
that had no issued or outstanding capital stock. On March 22, 2000 (the
Effective Date), Sun Life changed its business structure from a mutual
life insurance company to a stock life insurance company through a
process called ``demutualization'' (also referred to herein as the
``Conversion'').\3\
---------------------------------------------------------------------------
\3\ By a special act of the Canadian Parliament that was
ratified in 1865, Sun Life originally had a corporate existence as a
stock life insurance company. However, it was converted to a mutual
life insurance company in 1962 and it remained that way until March
22, 2000, at which time it became a stock life insurance company
once again.
---------------------------------------------------------------------------
Sun Life is subject to the Insurance Companies Act of Canada (ICA).
Its United States branch, which functions as a business unit through
which the insurer engages in the business of insurance in the United
States, is subject to the insurance laws of the State of Michigan. Sun
Life maintains its headquarters at 150 King Street West, Toronto,
Ontario, Canada M5H IJ9.
Sun Life, which has a Standard & Poor's rating of ``AA+'' and a
Duff & Phelps rating of ``AAA,'' carries on its insurance business in
Canada and internationally through its branches in the United States,
the United Kingdom, Hong Kong, Bermuda and the Philippines. In
addition, Sun Life carries on the business of life insurance,
investment management, mutual fund management, banking, and the
provision of trust services through various subsidiaries in Canada and
internationally. The insurance business in which Sun Life and its
international operations are engaged include the sale of various
insurance products, which include individual, group life, disability
and health insurance, as well as annuities and pensions.
Sun Life's principal place of business in the United States is One
Sun Life Executive Park, Wellesley Hills, Massachusetts. The insurer
uses Michigan as its port of entry in the United States. Consequently,
the Michigan Department of Insurance (the Michigan Insurance
Department) has the principal insurance regulatory authority over Sun
Life in the United States.
2. Sun Life and its affiliates provide a variety of fiduciary and
other services to pension and welfare plans that are covered under
relevant provisions of the Act and/or the Code. These services include,
but are not limited to, investment management and contract
administrative services, such as the payment of benefits and the
preparation of reports and schedules as required by law. By providing
these services, Sun Life may be considered a party in interest with
respect to such Plans under section 3(14)(A) and (B) of the Act or
other related provisions of section 3(14).
3. Sun Life sponsors several Plans which received distributions in
the Conversion that were allocated to Plan participants. These Plans
are referred to collectively as ``the Sun Life Plans'' and are
described below.
(a) The Sun Life United States Agents' and Salaried Field
Representatives' Retirement Plan (the Retirement Plan) is a pension
plan that has both defined benefit and defined contribution components.
As of December 31, 1999, the defined benefit component of the
Retirement Plan had $30,991,406 and 506 participants (336 retirees and
254 terminated vested participants). Also as of December 31, 1999, the
defined contribution component of the Retirement Plan had $3,519,425 in
total assets and 184 participants. A pension committee currently
exercises investment discretion over the assets of this Plan.
(b) The Sun Life Staff Life Insurance Plan (the Staff Life
Insurance Plan) is a welfare plan that is a term life plan. The Staff
Life Insurance Plan has no assets other than policies of insurance that
provide benefits to participants. As of December 31, 1999, the Staff
Life Insurance Plan had 1,680 participants who received life insurance,
670 participants who received optional benefits and 125 retirees.
(c) The Sun Life United States Staff Group Life Insurance Plan (the
Group Life Insurance Plan) is also a welfare plan that is a term life
plan. The sole assets of the Group Life Insurance Plan consist of
insurance policies that provide benefits to participants. As of
December 31, 1999, the Group Life Insurance Plan had 237 participants.
The Decision To Demutualize
4. As a mutual insurer, Sun Life had no stockholders. However,
certain of its policyholders were considered owners of the company. In
this capacity, the policyholders had certain rights, including the
right to elect directors of the company. These membership interests are
referred to herein as ``Ownership Interests.''
In November 1998, a bill was introduced in the Canadian Parliament
to amend the ICA to set forth the statutory rules that for the first
time would allow the demutualization of Canadian mutual life insurance
companies with assets in Canada of CDN$7.5 billion or more. When the
bill was introduced, the Canadian Department of Finance reported that
Canada's four largest mutual life insurance companies already had
announced their intention to develop demutualization plans.
The Canadian Department of Finance released Mutual Company (Life
Insurance) Conversion Regulations (the Conversion Regulations), which
became effective on March 12, 1999 and which implemented the new
legislation. On January 27, 1998, Sun Life issued a press release
stating that its Board of Directors had requested Sun Life's management
to develop a plan to convert Sun Life from a mutual life insurance
company to a publicly-traded stock company.
[[Page 54309]]
5. The principal purpose of the Conversion was to create a
corporate structure that would allow Sun Life to position itself for
long-term growth and increased financial strength in ways that were not
then available. Sun Life believed that as a result of the flexibility
to be offered by the stock company structure and the access to capital
markets, it would be in a position to enhance its market leadership,
financial strength and strategic position. In addition, Sun Life
believed that it would be able to pursue opportunities for growth,
thereby providing greater protection to policyholders.
As a result of the Conversion, Sun Life became a stock insurer and
a subsidiary of Sun Life Financial Services of Canada, Inc., a newly-
formed holding company. In addition, the Conversion provided economic
value to Eligible Policyholders in the form of Common Shares (which are
traded on the Toronto, New York, London and Philippines stock
exchanges),\4\ Cash or Policy Credits, in return for their respective
Ownership Interests in Sun Life.
---------------------------------------------------------------------------
\4\ Eligible Policyholders who received Common Shares were
accorded the following rights after the Conversion: (a) The right to
vote on matters submitted to such participating policyholders; (b)
the right to participate in the distribution of Sun Life's profits;
(c) the right to participate in the distribution of Conversion
benefits; and (d) the right to participate in the distribution of
any remaining surplus after satisfaction of all obligations in the
event Sun Life is liquidated.
---------------------------------------------------------------------------
6. Therefore, Sun Life requests a retroactive administrative
exemption from the Department that would apply, effective March 22,
2000, to the receipt of Common Shares, Policy Credits or Cash by
Eligible Policyholders which are Plans, including the Sun Life Plans
identified above, in exchange for their mutual membership interests in
Sun Life. To represent the interests of the Sun Life Plans with respect
to the Conversion, Sun Life has retained U.S. Trust Company, N.A. (U.S.
Trust) to serve as the independent Plan fiduciary.\5\
---------------------------------------------------------------------------
\5\ Sun Life also requested that the exemption cover the
acquisition and holding of Common Shares by the Sun Life Plans where
such transactions were in violation of sections 406(a)(1)(E) and
(a)(2) and 407(a)(2) of the Act. However, as discussed in
Representation 16, U.S. Trust determined that there were no such
violations because of the forms of consideration it had elected for
the various Sun Life Plans. In particular, U.S. Trust elected Cash
consideration for the Staff Life Insurance Plan and the Group Life
Insurance Plan, and Common Shares for the Retirement Plan.
The Department notes that no opinion is being provided herein
regarding whether the receipt of Common Shares by the Retirement
Plan, once U.S. Trust made the election, was covered by the
statutory exemption provided under section 408(e) of the Act.
---------------------------------------------------------------------------
The proposed exemption includes a requirement that all Eligible
Policyholders that were Plans participated in the transactions on the
same basis within their class groupings as other Eligible Policyholders
that were not Plans. Thus, Sun Life did not treat Plan policyholders
any differently from non-Plan policyholders within their respective
class groupings.
Regulatory Supervision
7. The various steps of the Conversion were subject to the approval
of Sun Life's Board of Directors, OSFI, which had oversight
responsibility for the entire conversion process, the Canadian Finance
Minister, the Michigan Insurance Commissioner, and other regulatory
authorities in Canada, the United Kingdom, Hong Kong, and the
Philippines (collectively referred to as the Regulators). In pertinent
part, the Conversion Regulations require that the conversion of a
mutual life insurance company be implemented in accordance with a
detailed proposal that sets forth the terms and means of effecting the
Conversion.
In accordance with this requirement, Sun Life's Board of Directors
adopted the Conversion Plan on September 28, 1999. A draft of the
Conversion Plan was submitted to OSFI, as principal Regulator, along
with certain specified information, including, among other things,
opinions of Sun Life's actuary and an independent actuary and opinions
of a valuation expert and a financial market expert.
After reviewing and commenting on the Conversion Plan, OSFI
authorized Sun Life to send approximately one million Eligible
Policyholders (of which less than one percent were Plans) notice of the
Special Meeting to consider the Conversion Plan. Policyholder
Information Statements were mailed to Eligible Policyholders on October
20, 1999. Eligible Policyholders voted in favor of the Conversion Plan
at the Special Meeting which was convened on December 15, 1999 in
Toronto, Ontario, Canada. Each Eligible Member was entitled to cast one
vote. Because the Conversion Plan was approved by the Eligible
Policyholders at the Special Meeting,\6\ Sun Life's Board of Directors
applied to the Canadian Finance Minister for approval of the Conversion
Plan and the issuance of Letters Patent of Conversion in order to
effect the Conversion. On March 22, 2000, the Canadian Finance Minister
approved the Conversion Plan and issued the Letters Patent of
Conversion.
---------------------------------------------------------------------------
\6\ Such approval required the affirmative vote of not less than
two-thirds of the votes cast by the Eligible Policyholders voting in
person or by proxy.
---------------------------------------------------------------------------
It should be noted that Canadian law does not require that the
Canadian Finance Minister make any particular findings in deciding
whether to approve the Conversion Plan. Therefore, approval was
entirely within the discretion of the Canadian Finance Minister.
However, the Canadian Finance Minister, in deciding whether to approve
the Conversion Plan, could consider such factors as: (a) Whether the
Conversion Plan was fair and equitable to policyholders; (b) whether
the Conversion Plan was in the best interest of the financial system in
Canada; and (c) whether sufficient steps had been taken to inform
policyholders of the Conversion Plan and of the special meeting on the
Conversion.
8. Because Sun Life operates in the United States through its U.S.
branch under the Michigan state of entry statute, the demutualization
law of Michigan (the Michigan Demutualization Law) also applied to Sun
Life's proposed Conversion. The Michigan Demutualization Law's
requirements are similar to those of the ICA and the Conversion
Regulations. Among other things, the statute requires that the
Conversion Plan be submitted to the Michigan Insurance Commissioner
prior to a vote by Sun Life's Eligible Policyholders. In addition, the
Conversion Plan cannot become effective without the approval of the
Michigan Insurance Commissioner following a public hearing, and such
Conversion Plan cannot be amended without the prior approval of the
Michigan Insurance Commissioner.
The Michigan Insurance Commissioner is authorized to retain, and
did subsequently retain, independent legal and actuarial advisers to
assist in reviewing the proposal. Under the Michigan Demutualization
Law, the Michigan Insurance Commissioner must approve or disapprove the
Conversion Plan within 90 days after its submission, and cannot approve
it unless he or she finds the Conversion Plan ``does not prejudice the
interests of its members, is fair and equitable, and is not
inconsistent with the purpose and intent of the Michigan
Demutualization Law.'' If approved, the Conversion would take effect as
of the Effective Date specified in the Conversion Plan (i.e., on March
22, 2000).
On November 22, 1999, a public hearing was held with respect to the
Conversion Plan in Lansing, Michigan. On December 8, 1999, the Michigan
[[Page 54310]]
Insurance Commissioner entered an order approving such Plan.
The Transaction
9. As noted above, the Conversion Plan provided for Sun Life to
demutualize and convert to a stock life insurance company pursuant to
section 237 et seq. of the ICA, the Conversion Regulations and the
terms of the Conversion Plan. Specifically, in advance of the
Conversion, Sun Life incorporated the Holding Company in Canada under
the ICA as a new stock life insurance company. Specifically, in
September 1999, Sun Life purchased shares of the Holding Company for
CDN$10 million, as required under the ICA.
At the Effective Date of the Conversion, Section 2.2 of the
Conversion Plan provides for the following transactions, which among
others, took place as part of the Conversion:
All policyholder rights with respect to, and interests
in, Sun Life ceased;
Sun Life issued its common shares to the Holding
Company;
The Holding Company issued its Common Shares to
Eligible Policyholders who were issued such shares in exchange for
their Ownership Interests and other Eligible Policyholders received
Policy Credits or Cash in accordance with Article 4 of the
Conversion Plan; and
Sun Life surrendered to the Holding Company, and the
Holding Company purchased for cancellation, for consideration equal
to the initial issue price thereof, all of the Common Shares Sun
Life held immediately before the Effective Date.
10. The applicant represents that the Conversion did not (and will
not) affect the terms of any of Sun Life's policies. Rather, all
policies will continue in force with Sun Life in accordance with their
current terms notwithstanding the Conversion. In particular, the
Conversion will not affect the level of premiums, coverage or benefits
payable under any Policies, and dividends will continue to be declared
with respect to participating policies at the discretion of Sun Life's
Board of Directors. Accordingly, the Conversion will not adversely
affect the contractual rights of any participating policyholder.
However, all policyholder rights with respect to, and interests in, Sun
Life as a mutual company ceased upon the Conversion.
In connection with the Conversion, Eligible Policyholders became
entitled to their benefits (in whatever form) on the Effective Date
(i.e., March 22, 2000). Share certificates, which entitled Eligible
Policyholders to Common Shares, were mailed prior to the Effective Date
and became ``live'' certificates upon the closing of the Conversion.
Policy Credits were also credited to other Eligible Policyholders on
the Effective Date. On March 23, 2000, a public offering of the Holding
Company's Common Shares (i.e., the IPO) was closed, at which time the
Holding Company paid Cash to Eligible Policyholders who were entitled
to receive consideration in this form.
11. Specifically, Policy Credits were posted to each Eligible
Policyholder in the United States whose participating policy was--
An individual retirement annuity contract within the
meaning of section 408(b) [of the Code] or a tax sheltered annuity
contract within the meaning of section 403(b) of the Code, including
for this purpose, custodial accounts under section 403(b)(7) and
retirement income accounts under section 403(b)(9);
An individual annuity contract that had been issued
directly to the Plan participant pursuant to a Plan qualified under
section 401(a) of the Code or pursuant to a Plan described in
section 403(a) [of the Code] directly to the Plan participant; or
An individual life insurance Policy that had been
issued directly to the Plan participant pursuant to a Plan qualified
under section 401(a) [of the Code]; \7\
\7\ In certain circumstances, Policy Credits could also be
posted to Eligible Policyholders who did not reside in the United
States or where the Board of Directors had determined that the
receipt of Common Shares would be disadvantageous to the
policyholders.
---------------------------------------------------------------------------
Notwithstanding the above, Common Shares were paid to policyholders
of individual annuity contracts who were in pay status or whose
policies had been terminated and the payment of Common Shares would not
raise qualification issues under the Code. Similarly, Common Shares
were paid in connection with individual retirement annuities covered
under section 408(b) of the Code where the receipt of Common Shares
would also not raise qualification issues under the Code.\8\
---------------------------------------------------------------------------
\8\ If an Eligible Policyholder was in ``pay status,'' Sun Life
states that the policyholder would have reached an age where he or
she would be entitled to receive a distribution under his or her Sun
Life policy. Under these circumstances, any distribution of Common
Shares or Cash to such policyholder would not be considered
premature and would not trigger adverse consequences, such as the
disqualification of the Plan.
---------------------------------------------------------------------------
Finally, the Holding Company made a direct cash payment to each
Eligible Policyholder who would be subject to a mandatory cash-out, if
Sun Life knew that the policyholder's Participating Policy was subject
to a lien or to a bankruptcy proceeding or to certain other title
restrictions.\9\
---------------------------------------------------------------------------
\9\ Sun Life anticipated that fewer than 10 percent of the
Eligible Policyholders would receive demutualization benefits in the
form of Cash or Policy Credits and that at least 90 percent of the
Eligible Policyholders would be issued common Shares.
---------------------------------------------------------------------------
12. Eligible Policyholders whose addresses are unknown to the
Holding Company have been classified as ``Lost Policyholders.'' Lost
Policyholders who have been issued Common Shares in connection with the
Conversion will have such shares recorded in their names on the Holding
Company's share register. Common Shares issued to a Lost Policyholder
who do not take certain specified actions \10\ within 35 months of the
Effective Date will revert to the Holding Company together with any
dividends paid on such shares. However, after such reversion, the
Holding Company will be required to deliver the Common Shares and
accumulated dividends (without interest) \11\ to the Lost Policyholder
if he or she subsequently claims them.
---------------------------------------------------------------------------
\10\ In order to cease being a Lost Policyholder, a policyholder
must take one of the following actions: (a) Respond to a letter from
Sun Life or the Holding Company requesting confirmation of his or
her current address; (b) contact Sun Life or the Holding Company and
confirm his or her current address; (c) inform Sun Life or the
Holding Company of a change of address; or (d) otherwise confirm his
or her current address to Sun Life or the Holding Company in a
manner satisfactory to Sun Life or the Holding Company, as
applicable.
\11\ Sun Life represents that it does not propose to pay
interest on accumulated dividends to Lost Policyholders because it
is not the standard practice among insurance companies to do so,
whether in the context of demutualizations, or more generally, of
shareholders who are late in claiming dividends.
---------------------------------------------------------------------------
13. About 40 percent of Sun Life's Eligible Policyholders were
Canadian residents, 15 percent were U.S. residents, and 45 percent were
residents of other countries. While United States residents would
comprise roughly 15 percent of the total number of Eligible
Policyholders, such policyholders would receive approximately 25
percent of the total Common Shares distributed in Sun Life's
Conversion.\12\
---------------------------------------------------------------------------
\12\ The differences between the relative numbers of Eligible
Policyholders residing in each country and the estimated percentages
of total Common Shares to be distributed to such Eligible
Policyholders who resided in each covered country were attributable
to the fact that Conversion benefits would be allocated in part
based on such factors as the type, duration, face amount and cash
surrender value of an eligible policy, and not simply on a per
capita basis.
---------------------------------------------------------------------------
14. As required by the Conversion Regulations, the Conversion Plan
was accompanied by an opinion prepared by the actuary for Sun Life and
an opinion prepared by an independent actuary that the allocation of
benefits to Eligible Policyholders in the Conversion was fair and
equitable. Eligible Policyholders who were issued Common Shares in the
Conversion could elect, by February 16, 2000, to have some or all of
those shares (the Electing Shares) sold for cash in the
[[Page 54311]]
IPO.\13\ The purchasers of the Electing Shares were required to be
either independent investment dealers or investment banks (the
Underwriters) who had entered into underwriting agreements with Sun
Life and the Holding Company with respect to the IPO. In regard to
purchases of Electing Shares by the Holding Company, Plans that were
covered under the provisions of the Act were not permitted to engage in
such transactions as the transactions were considered prohibited
transactions. No commissions or fees were charged to Eligible
Policyholders seeking to sell Electing Shares.\14\
---------------------------------------------------------------------------
\13\ In other words, if an Eligible Policyholder was a resident
of the United States and was issued less than 1,000 Common Shares,
the policyholder was required to make a cash election for all of
such shares. However, if the Eligible Policyholder was issued 1,000
or more Common Shares in the IPO, the policyholder could make a cash
election to sell any of such shares.
\14\ The offering price for the Common Shares was CDN$12.50 per
share and U.S.$8.50 per share. These were equivalent amounts using
the exchange rate on the date of the pricing, which occurred on
March 22, 2000. The Canadian dollar price applied to Common Shares
that were sold in Canada and the U.S. dollar price applied to shares
that were sold both in the United States and internationally.
---------------------------------------------------------------------------
A total of 143,602,914 Common Shares were sold in the IPO.\15\ The
total number of Common Shares sold in the IPO was set by the Holding
Company and the Underwriters prior to the IPO. The Holding Company also
paid the Underwriters' fees that were associated with the Underwriters'
purchase of the Common Shares from Eligible Policyholders \16\ and the
sale of the Common Shares in the IPO.\17\
---------------------------------------------------------------------------
\15\ Of this total, Canadian Eligible Policyholders received
93,341,894 Common Shares, U.S. Eligible Policyholders received
35,900,729 Common Shares and International Eligible Policyholders
received 14,360,291 Common Shares.
\16\ Sun Life concluded (and it advised its Eligible
Policyholders and the Internal Revenue Service) that its payment of
the Underwriters' fee for Eligible Policyholders who sold their
Common Shares in the IPO would be treated as a dividend for Canadian
tax purposes. Sun Life further advised its Eligible Policyholders
that Canadian non-resident withholding tax would apply to such
deemed dividend, and that the rate would generally be 15 percent.
The amount of the tax would be withheld from the proceeds of the
sale of the Common Shares and would be remitted to the Canadian tax
authorities. Finally, Sun Life advised its Eligible Policyholders
that they could take the amount of the Canadian withholding tax into
account as a credit or a deduction in determining their United
States income tax.
\17\ Consistent with sections 1 and 4(1)(e)(i) of the Conversion
Regulations, the Conversion Plan generally provides that the
policyholder eligible to participate in the distribution of Common
Shares, Cash or Policy Credits resulting from the Conversion Plan is
the ``owner'' of the policy, and that the ``owner'' of any policy
shall generally be determined on the basis of the records of Sun
Life. Sun Life further represents that an insurance or annuity
policy that provides benefits under an employee benefit plan,
typically designates the employer that sponsors the plan, or a
trustee acting on behalf of the plan, as the owner of the policy. In
regard to insurance or annuity policies that designate the employer
or trustee as owner of the policy, Sun Life represents that it is
required under the foregoing provisions of Canadian law and the
Conversion Plan to make distributions resulting from such Plan to
the employer, or trustee as owner of the policy, except as provided
below.
In general, it is the Department's view that, if an insurance
policy (including an annuity contract) is purchased with assets of
an employee benefit plan, including participant contributions, and
if there exist any participants covered under the plan (as defined
at 29 CFR 2510.3-3) at the time when Sun Life incurred the
obligation to distribute Common Shares, Cash or Policy Credits, then
such consideration would constitute an asset of such plan. Under
these circumstances, the appropriate plan fiduciaries must take all
necessary steps to safeguard the assets of the plan in order to
avoid engaging in a violation of the fiduciary responsibility
provisions of the Act.
---------------------------------------------------------------------------
Except for a very small number of Common Shares that were sold to
fund mandatory direct Cash payments (as distinguished from Cash
elections), and Policy Credits, all of the Common Shares sold in the
IPO represented shares allocated to Eligible Policyholders who decided
to redeem their shares for Cash. (All Eligible Policyholder Cash
requests were honored, i.e., no policyholder who elected Cash received
Common Shares.)
On March 31, 2000, each Underwriter exercised an ``overallotment
option'' granted to them in their respective Underwriting Agreements.
The option permitted the Underwriters to purchase an additional
21,540,437 Common Shares from the Holding Company that were equal to 15
percent of the main offering. The sale of the Common Shares closed on
April 4, 2000. As a result, Canadian Eligible Policyholders received
14,001,284 Common Shares, U.S. Eligible Policyholders received
5,385,109 Common Shares and International Eligible Policyholders
received 2,154,044 Common Shares.
CIBC Mellon Trust Company, or its successors or assigns, is serving
as the registrar and transfer agent (the Transfer Agent) for the Common
Shares. The Transfer Agent will record the Common Shares on a share
register on behalf of the Holding Company. The Transfer Agent also will
be responsible for transmitting dividend payments from the Holding
Company to the Holding Company shareholders.
15. In addition to allowing Eligible Policyholders to sell their
Electing Shares in the IPO, Sun Life has established a service,
effective March 23, 2000, which affords Eligible Policyholders,
including U.S. Eligible Policyholders, who hold Common Shares in their
Sun Life Share Accounts, the opportunity to sell such shares after the
IPO. The sales are being executed through TD Waterhouse Investor
Services (TD Waterhouse), an unrelated broker-dealer. All sales through
TD Waterhouse are being treated as ordinary brokerage transactions that
are made at prevailing market prices on the New York Stock Exchange and
are subject to TD Waterhouse's normal commission rates. Sun Life
represents that no time limit has been imposed on sales of Common
Shares through TD Waterhouse. \18\
---------------------------------------------------------------------------
\18\ Sun Life initially proposed to offer a share selling
service (the Share Selling Service) to recipients of Common Shares.
Under the Share Selling Service, Eligible Policyholders would be
permitted to sell their Common Shares at prevailing market prices
without the payment of fees or commissions. Sun Life represents that
it was unable to offer the Share Selling Service to Eligible
Policyholders residing in the United States because the New York
Stock Exchange and the Securities Exchange Commission would have
required Sun Life to issue Common Shares to Eligible Policyholders
in non-certificated form provided the Common Shares had been
included in Depository Trust Company's Direct Registration System
(the DRS). Because Sun Life's registrar and transfer agent did not
have the equipment and systems necessary to access the DRS, Sun Life
decided to issue Common Shares to Eligible Policyholders in
certificated form. Nevertheless, for technical and logistical
reasons, Sun Life declined to offer the Share Selling Service using
physical share certificates.
---------------------------------------------------------------------------
16. Following the Conversion, a participating account mechanism
(the Participating Account) will be implemented by Sun Life, as
provided for in the Conversion Plan. With respect to the participating
policies in force at the date of the Conversion, the Participating
Account will operate like a closed block. In other words, a set of
assets for such policies (e.g., bonds, mortgages, real estate, cash and
cash equivalents), that are designed to meet Sun Life's contractual
obligations and policyholder reasonable dividend expectations with
respect to those policies, will be earmarked. Sun Life represents that
the Participating Account will not alter, diminish, reduce, or in any
way affect a policyholders' contractual rights. Although the details of
the Participating Account have been developed by Sun Life in
conjunction with OSFI and the Michigan Insurance Department, Sun Life's
actuaries and the actuarial advisers to OSFI have not yet determined
the specific dollar amount of assets that will be placed in the
Participating Account. \19\
---------------------------------------------------------------------------
\19\ The Participating Account, which includes polices issued
both before and after the Conversion, responds to concerns that a
demutualization will adversely affect the value of dividend-paying
policies since Sun Life's profits, following the Conversion will be
shared with the shareholders. It is represented that traditionally,
insurers have addressed the concern over the value of dividend-
paying policies by segregating pre-demutualization participating
policies in a ``closed block'' containing assets sufficient to cover
the liabilities associated with those policies in order to protect
the policies from the demands of shareholders. In effect, experience
and investment gains and losses associated with policies in the
closed block will only affect the closed block. Thus, the block will
be closed in two contexts--(a) no new policies can be added and (b)
the block will be ``closed off'' from the rest of the insurer's
business.
With respect to Sun Life's Participating Account which operates
like the closed block, an appointed actuary, who reports to OSFI,
will certify that the assets placed in the Participating Account are
sufficient to cover the liabilities associated with the pre- and
post-demutualization participating policies, including the
reasonable dividend expectations of those policyholders. Sun Life is
required to place additional assets in the Participating Account, if
necessary, and may transfer amounts out of such account after five
years only if the appointed actuary determines that the assets are
more than sufficient to cover the liabilities of the participating
policies.
---------------------------------------------------------------------------
[[Page 54312]]
Under the ICA, participating policyholders also will have rights
upon completion of the Conversion that are accorded to participating
policyholders of a stock life insurance company in Canada. Such rights
include the right to elect at least one-third of the Sun Life's
Directors as well as the right to any dividends that are declared.
17. As noted above, in the case of the Sun Life Plans, U.S. Trust
is representing their interests and it has acknowledged and accepted
the duties, responsibilities and liabilities required of an independent
fiduciary. In this regard, U.S. Trust represents that it is an
affiliate of United States Trust Company of New York (USTC). USTC was
founded in New York in 1853 and is subject to regulation as a trust
company by the State of New York. USTC is the principal subsidiary of
U.S. Trust Corporation, a member of the Federal Reserve System and the
Federal Deposit Insurance Corporation, and an entity having
approximately $4.1 billion in assets as of December 31, 1999. USTC has
over $75 billion in assets under management, a significant percentage
of which consists of the assets of Plans that are covered by the Act
and/or Code.
In addition, U.S. Trust has served as an independent fiduciary for
numerous Plans that acquire or hold employer securities and it has
managed, at various times, over $16 billion in employer securities that
have been held by such Plans. In managing these investments, U.S. Trust
has acted as a fiduciary in a number of transactions involving the
acquisition, retention and disposition of employer securities.
U.S. Trust is independent of Sun Life and its affiliates. In this
respect, it has no business, ownership or control relationship, nor is
it affiliated with Sun Life and its affiliates. In addition, U.S. Trust
derives less than one percent of its annual income from Sun Life and
its affiliates.
U.S. Trust states that it was retained by Sun Life to consider, on
behalf of the Sun Life Plans, whether to approve the Conversion Plan
and, if approved, whether to receive consideration in the form of
Common Shares or Cash. Specifically, U.S. Trust determined, pursuant to
its engagement letter with Sun Life and subject to satisfaction of
certain contingencies, that the consummation of the transactions would
be prudent for each of the Sun Life Plans. In particular, U.S. Trust:
(a) Determined that the Conversion Plan was in the best interest of the
Sun Life Plans and their participants and beneficiaries; (b) voted for
the Conversion Plan on behalf of the Sun Life Plans; (c) received
either Common Shares or Cash on behalf of a Sun Life Plans; (d)
determined that the transactions would not violate the investment
objectives and policies of the Sun Life Plans; (e) negotiated a
reasonable allocation of proceeds between Sun Life and the participants
in the Sun Life Plans based upon employee and employer contributions
made to such Sun Life Plans over a three year period; and (f) took (and
will continue to take until the proposed exemption becomes final) all
actions that were (or will be) necessary and appropriate to safeguard
the interests of the Sun Life Plans.
U.S. Trust states that the aforementioned determinations were based
upon its analyses of Sun Life's Conversion Plan and financial
performance. In addition, U.S. Trust explains that its determinations
were based upon the assumption that the exemption would be granted.
Further, U.S. Trust notes that the consummation of the transactions was
conditioned upon approval by Eligible Policyholders of the Conversion
Plan, including the receipt of Canadian and Michigan regulatory
approvals, and other conditions set forth in the Conversion Plan.
As a general matter, U.S. Trust states that its determinations
regarding the proposed transactions were based upon its economic
analysis of the consideration to be acquired by the Sun Life Plans. In
this connection, U.S. Trust represents that it performed a
comprehensive analysis of Sun Life in the context of prevailing market
conditions and concluded that the proposed aggregate consideration that
would be received by the Sun Life Plans was fair to such Plans from
financial point of view. In forming its conclusion, U.S. Trust asserts
that it reviewed various documents, including but not limited to, (a)
Sun Life's annual reports and related financial information; (b) a
Statement of Actuarial Opinion regarding the methodology used to
allocate the demutualization benefits among the policyholders; (c)
opinions of the appointed actuary; and (d) ratings of Sun Life by
Standard & Poor's and Duff & Phelps. In addition, U.S. Trust represents
that it hired independent legal counsel and reviewed all relevant
information regarding the Plans and public documents provided by the
Michigan Insurance Commissioner.
On December 15, 1999, U.S. Trust states that its Special Fiduciary
Committee (the Special Fiduciary Committee), including representatives
from corporate counsel and other bank management, met and determined
that the transactions were in the best interests of the participants
and beneficiaries of the Sun Life Plans. Then, on February 9, 2000, the
Special Fiduciary Committee convened again and determined to elect to
receive compensation in the form of 139,787 Common Shares for the
Retirement Plan, and to elect to receive Cash for the Staff Life
Insurance Plan (i.e., the cash equivalent of 53,144.5 shares) and the
Group Life Insurance Plan (i.e. the cash equivalent of 34,573.5
shares).
Both the Staff Life Insurance Plan and the Group Life Insurance
Plan provide for employee contributions.\20\ Therefore, U.S. Trust
represents that it asked Sun Life to describe whether and how
participants in those Plans would be assured of enjoying benefits equal
to that portion of the demutualization consideration allocated to each
Plan that was attributable to past participant contributions.
---------------------------------------------------------------------------
\20\ U.S. Trust did not address the allocation of Common Shares
to the Retirement Plan in its independent fiduciary report. Sun Life
represents that because the Retirement Plan has both a defined
benefit and a defined contribution component, the Common Shares that
were received as a result of the Conversion were pursuant to an
investment in the defined benefit component. Therefore, the Common
Shares are being held with the other assets of the Retirement Plan.
---------------------------------------------------------------------------
With respect to the Staff Life Insurance Plan under which
participants make contributions solely to pay for optional benefits and
Sun Life makes contributions for basic benefits, U.S. Trust explains
that the proportion of total premiums paid by participants was 38
percent. Therefore, Sun Life proposed to allocate 38 percent of the
demutualization proceeds to pay for optional participant benefits under
the Staff Life Insurance Plan. According to U.S. Trust, Sun Life
expects that the demutualization proceeds would be sufficient to pay
for a 1.5 year ``premium holiday'' for participants
[[Page 54313]]
with respect to the optional benefit based on a sale of the Common
Shares at the assumed IPO price and current premium costs.
Under the Group Life Insurance Plan, U.S. Trust notes that
participants contributed 54 percent of the total premiums paid by this
Plan until 1997, after which time the Plan became totally
noncontributory. U.S. Trust points out that Sun Life proposed to
increase the benefit levels of the current participants so that these
participants would be able to share in the demutualization proceeds in
a manner proportionate to their past contributions. In this regard,
benefits for participants in the Group Life Insurance Plan would be
enhanced by 54 percent of the Conversion consideration received,
thereby representing the same ratio participant premium payments bore
to the total premiums paid. Although Sun Life expected the
demutualization proceeds would be sufficient to pay for two years of
the benefit enhancement based on a sale of the Common Shares at the
assumed IPO price and current premium costs,\21\ U.S. Trust explains
that the Group ife Plan would remain noncontributory.
---------------------------------------------------------------------------
\21\ In this proposed exemption, the Department is not
commenting on or providing exemptive relief with respect to the
allocation methodology utilized by U.S. Trust.
---------------------------------------------------------------------------
In evaluating Sun Life's proposed methods of providing benefits to
participants equal to the portion of the demutualization consideration
received by each Sun Life Plan that was attributable to participant
contributions, U.S. Trust states that it took into account such factors
as: (a) The practical impossibility of allocating benefits directly to
the participants whose contributions contributed to the demutualization
proceeds;\22\ (b) the substantial overlap between the groups of
participants making such contributions and the participants receiving
benefits; (c) the use of an allocation method involving participant
contributions over a period of years rather than a single year; and (d)
the economic value to participants of the proposed ``premium holiday.''
Based upon these factors, U.S. Trust determined that the proposed
method for allocating benefits to each Sun Life Plan was reasonable and
fair to the respective Plan participants as a group.
---------------------------------------------------------------------------
\22\ According to U.S. Trust, both the Staff Life Insurance Plan
and the Group Life Insurance Plan will bear the cost of allocating
demutualization proceeds among participants based on actual
contributions.
---------------------------------------------------------------------------
18. In summary, it is represented that the transactions satisfied
or will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Conversion Plan, which was implemented pursuant to
stringent procedural and substantive safeguards imposed under Canadian
and Michigan law, will not require any ongoing supervision by the
Department.
(b) One or more independent Plan fiduciaries, including U.S. Trust,
which is representing the interests of the Sun Life Plans, had an
opportunity to determine whether to vote to approve the Conversion Plan
and was responsible for all such decisions.
(c) Eligible Policyholders that were Plans were allowed to acquire
Common Shares, Cash or Policy Credits, in exchange for and in
extinguishment of, their membership interests in Sun Life, and no
Eligible Policyholder paid any brokerage commissions or fees to Sun
Life or its affiliates in connection with their receipt of Common
Shares or with respect to the sale of Electing Shares in the IPO.
(d) Neither Sun Life nor its affiliates exercised discretion with
respect to voting on the Conversion Plan or with respect to an election
made by any Eligible Policyholder which was a Plan, nor did Sun Life or
its affiliates provide ``investment advice,'' as that term is defined
in 29 CFR 2510.3-21(c) with respect to any election made by such Plan
policyholder.
(e) The Conversion did not (and will not) reduce policy benefits,
values or guarantees, or increase premiums, in any way, and dividend-
paying policies will continue to receive dividends if and when
declared.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
IRA FBO Floyd A. Ross (the IRA), Located in Ukiah, California
[Application No. D-10871]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570 Subpart B (55 FR 32836, 32847,
August 10, 1990). If the exemption is granted, the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed
purchase by the IRA of certain closely held common stock (the Stock)
from the Ross Family Trust (the Family Trust), a disqualified person
with respect to the IRA,\23\ provided that the following conditions are
satisfied:
---------------------------------------------------------------------------
\23\ Pursuant to 29 CFR 2510.3-2(d), the IRA is not within the
jurisdiction of Title I of the Act. However, there is jurisdiction
under Title II of the Act, pursuant to section 4975 of the Code.
---------------------------------------------------------------------------
(a) The purchase is a one-time transaction for cash;
(b) The terms and conditions of the purchase are at least as
favorable to the IRA as those available in a comparable arm's length
transaction with an unrelated party;
(c) The IRA pays a purchase price that is no greater than the fair
market value of the Stock at the time of the transaction, as
established by a qualified, independent appraiser;
(d) The IRA pays no commissions nor other expenses in connection
with the purchase; and
The fair market value of the Stock represents no more than 25
percent of the total assets of the IRA at the time of the transaction.
Summary of Facts and Representations
1. The IRA is an individual retirement account, as described under
section 408(a) of the Code. The IRA was established by Floyd A. Ross,
who is the sole participant. As of June 30, 2000, the IRA had total
assets of $373,222.91. The trustee of the IRA is the Capital Guardian
Trust Co.
2. It is proposed that the IRA purchase shares of the Stock from
the Family Trust, established October 23, 1985, with Mr. Ross and his
wife as the grantors and co-trustees.\24\ All of the community property
of the grantors and their separate property as husband and wife have
been conveyed to the Family Trust.
---------------------------------------------------------------------------
\24\ Section 4975(e)(2)(G) of the Code defines the term
``disqualified person'' to include a trust of which (or in which) 50
percent or more of the beneficial interest of such trust is owned,
or held by, a fiduciary of a plan.
---------------------------------------------------------------------------
The Stock consists of shares of the Savings Bank of Mendocino
County (the Bank), a state chartered bank headquartered in Ukiah,
California. Mr. Ross is the Executive Vice President of the Bank.
According to the applicant, the Bank was established in 1903, and a
majority of the 100,000 shares outstanding of the Stock is held by a
descendant of one of the Bank's founders, who is not related to Mr.
Ross. There are a total of 265 registered shareholders of the Stock.
The Family Trust holds 1,332 shares of the Stock. Mr. Ross does not own
any shares of the Stock in his personal capacity. The Stock has paid
quarterly dividends every year and has paid $4.50 per share each
quarter of the current year.
3. The Stock has been appraised by F. D. Grothe, a qualified,
independent
[[Page 54314]]
appraiser. Mr. Grothe is a Certified General Real Estate Appraiser
licensed in the State of California and maintains his appraisal
business in Lakeport, California. He also serves as the California
Probate Referee for Lake and Mendocino Counties in Northern California,
which encompass the areas served by the Bank. In an appraisal report,
dated April 7, 2000, Mr. Grothe states that, in his duties as Probate
Referee, he is required to appraise all assets, including closely held
stock, in probate estate cases heard in the Superior Courts of the
State of California for Lake and Mendocino Counties. In this capacity,
he is required to value the Bank's Stock two to four times a year, upon
the death of one of the Stock's shareholders. Thus, Mr. Grothe is
familiar with the appropriate valuation methodologies for determining
the fair market value of the Stock.
Mr. Grothe concluded that the fair market value of the Stock was
$755.00 per share, as of April 7, 2000. He states that the Bank is
nationally ranked among the top one percent of small banks. Mr. Grothe
attached to his report a list of the last five sales of the Stock. He
states that these sales are market-driven and are higher than the
average book value of the Stock, which, according to the 1999 Annual
Report, was $635.80 per share. He also states that the market for
stocks in small, independent banks is driven by larger banks wanting to
expand into certain areas. It has been Mr. Grothe's experience that
most merger sales are at two to two and one-half times book value.
Thus, in Mr. Grothe's opinion, the $775.00 per share market price could
be very conservative, in the event of a merger or buyout.
4. Accordingly, the applicant represents that the Stock is an
excellent investment opportunity for the IRA. Thus, it is proposed that
25 percent of the IRA's assets ($93,305.73) be used to purchase
approximately 120 shares (assuming a value of $775.00 per share) of the
1332 shares of the Stock held by the Family Trust.\25\ The Stock to be
acquired by the IRA will represent less than one percent of the total
outstanding shares of the Stock at the time of the transaction.
---------------------------------------------------------------------------
\25\ See ERISA Advisory Opinion 2000-10A (July 27, 2000) for a
recent discussion of the Department's views regarding co-investing
by an IRA and certain disqualified persons in a limited partnership.
The Department notes that no relief is being provided in this
proposed exemption beyond the IRA's initial purchase of the Stock
for any additional prohibited transactions that may occur as a
result of co-investing by the IRA and the Family Trust in shares of
the Stock.
---------------------------------------------------------------------------
The IRA's purchase price will be the fair market value of the Stock
at the time of the transaction, based upon an updated independent
appraisal. The IRA will pay no commissions nor other expenses in
connection with the purchase. The applicant represents that, although
the Stock is closely held, there is a definite market for the Stock.
Therefore, the applicant states that the proposed purchase of the Stock
by the IRA will not adversely affect the liquidity needs of the IRA.
5. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria for an exemption under
section 4975(c)(2) of the Code because: (a) The purchase will be a one-
time transaction for cash; (b) the terms and conditions of the purchase
will be at least as favorable to the IRA as those available in a
comparable arm's length transaction with an unrelated party; (c) the
IRA will pay a purchase price that is no greater than the fair market
value of the Stock at the time of the transaction, as established by a
qualified, independent appraiser; (d) the IRA will pay no commissions
nor other expenses in connection with the purchase; and (e) the fair
market value of the Stock will represent no more than 25 percent of the
total assets of the IRA at the time of the transaction.
Notice to Interested Persons
Because Mr. Ross is the sole participant in his IRA, it has been
determined that there is no need to distribute the notice of proposed
exemption to interested persons. Comments and requests for a hearing
with respect to the proposed exemption are due within 30 days of the
date of publication of this notice in the Federal Register.
For Further Information Contact: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Platt Orthopedics Retirement Plan (the Plan), Located in Rancho
Mirage, California
[Application No. D-10875]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the proposed sale by the Plan of certain improved real property (the
Property) to Morris and Arthur Platt, disqualified persons with respect
to the Plan,\26\ provided that the following conditions are satisfied:
(1) The sale is a one-time transaction for cash; (2) the Plan pays no
commissions nor other expenses relating to the sale; and (3) the Plan
receives an amount equal to the average of two independent appraisals
of the Property's fair market value, as of the date of the sale.
---------------------------------------------------------------------------
\26\ Because Morris and Arthur Platt, who are owner-employees,
and Arthur Platt's wife are the only participants in the Plan, the
Plan is not within the jurisdiction of Title I of the Act. However,
there is jurisdiction under Title II of the Act, pursuant to section
4975 of the Code.
---------------------------------------------------------------------------
Summary of Facts and Representations
1. The Plan, which is a defined contribution profit sharing plan
sponsored by Platt Orthopedics (the Employer), has three participants,
Morris and Arthur Platt and Arthur Platt's wife. Morris and Arthur
Platt, orthopedic surgeons, are the owners of the Employer and the
trustees of the Plan. Their practice was formerly in the State of New
York but was relocated to Rancho Mirage, California. The fair market
value of the assets of the Plan was $762,832, as of December 31, 1998,
the date of the Plan's most recently available financial statement.
2. The Property consists of a five-story commercial building on a
2,319 sq. ft. lot, located at 165 Orchard Street, Borough of Manhattan,
New York, New York. The building is vacant and boarded up and in need
of renovation. The adjacent lots are owned by persons unrelated to the
Plan, the Employer, and the Platts.
3. The Property was acquired by the Plan from Orcho Realty, an
unrelated party, in 1996, for a total purchase price of $435,000. Orcho
Realty also financed the purchase of the Property, which the Plan now
owns free and clear. The applicants represent that the following
amounts were expended by the Plan at various times from September 3,
1996 to December 31, 1999 in connection with the purchase of the
Property (mortgage and interest payments), plus expenses (maintenance,
taxes, and insurance): $206,381.25 in 1996; $60,100 in 1997; $98,347 in
1998; and $134,023 in 1999. Thus, including the $435,000 purchase
price, the Plan has made total expenditures of $498,851.25 with respect
to the Property from 1996 to 1999. The applicants represent that the
Property has not been leased to, nor used by, by anyone, including a
disqualified person with respect to the Plan, at any time since its
acquisition by
[[Page 54315]]
the Plan. The Property has produced no income for the Plan.
4. The applicants have obtained two appraisals of the Property by
qualified, independent appraisers, both certified in the State of New
York. The first appraiser is Eric A. Sterling, IFA, ASA, GAA, of
Sterling Appraisals Associates, Inc. (the Sterling Appraisal), located
in Bronx, New York. The Sterling Appraisal, relying on the Direct Sales
Comparison Approach to valuation, estimated that the fair market value
of the Property was $460,000, as of September 23, 1999. The second
appraiser is John M. Watch, of JW Consulting (the Watch Appraisal),
located in Flushing, New York. The Watch Appraisal utilized the Market
Approach and Cost Approach and concluded that the fair market value of
the Property was $525,000, as of September 24, 1999.
The Sterling Appraisal examined four recent sales of comparable
properties, while the Watch Appraisal examined five recent sales of
comparable properties, in the local real estate area, in making a
determination of the fair market value of the Property. The zoning of
the Property is ``C6-1, Commercial.'' Both appraisals noted that the
improvements are in poor condition and that the Property needs to be
restored before it can attain its highest and best use, which likely
would be a ``Mixed Use'' apartment building with retail space on the
ground level.
5. The applicants represent that they have attempted to sell the
Property on the open market but were advised by a broker that, because
the Property needs extensive renovation, it would be difficult to sell
at all, except for a bargain price. The applicants propose, therefore,
to purchase the Property from the Plan for an amount in cash equal to
the fair market value of the Property, as of the date of the sale. This
amount would be based upon an average of the two independent appraisals
referred to in Item 4, above, because of a significant disparity in the
valuations. This amount was $492,500, as of September, 1999. The
appraisals will be updated at the time of the transaction. The Plan
would pay no commissions nor other expenses relating to the sale.
The applicants represent that the exemption will be in the best
interests of the Plan because the sale will allow the Plan to divest
itself of a non-income producing, illiquid asset. In addition, the sale
proceeds will be reinvested in other assets that will increase
diversification of the Plan's assets, achieve a higher overall rate of
return for the Plan's assets, and facilitate the payment of retirement
benefits.
6. In summary, the applicants represent that the proposed
transaction satisfies the statutory criteria for an exemption under
section 4975(c)(2) of the Code for the following reasons: (a) The sale
will be a one-time transaction for cash; (b) the Plan will pay no
commissions nor other expenses relating to the sale; (c) the Plan will
receive an amount equal to the average of two independent appraisals of
the Property's fair market value, as of the date of the sale; and (d)
the sale will allow the Plan to reinvest the sale proceeds in other
assets that will achieve greater diversification and a higher overall
rate of return for the Plan's assets.
Notice to Interested Persons
Because Morris and Arthur Platt, and Arthur Platt's wife, are the
only participants in the Plan to be affected by the subject
transaction, it has been determined that there is no need to distribute
the notice of proposed exemption to interested persons. Comments and
requests for a hearing with respect to the proposed exemption are due
within 30 days of the date of publication of this notice in the Federal
Register.
For Further Information Contact: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 31st day of August, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 00-22854Filed 9-6-00; 8:45 am]
BILLING CODE 4510-29-P